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31 October 2015

Press review 31-10-2015 - Uncertainty

Petroleum prices remain in the flat line around 50 $/b shaped since mid August. Pundits issue forecasts to all tastes, some say the price has to drop further, others that it will have to rise, otherwise even core exporters like Saudi Arabia or Russia will go under. The market reflects this uncertainty, with a good degree of indirectioned volatility. Meanwhile, the Euro sank again below 1.1 against the US dollar this week, meaning an effective rising trend in end products cost.

It is in this environment that comes another blow to heavy petroleum resources, with Shell cancelling an important project in Canada's tar sands. The media keeps touting the mantras regarding Canada: "more oil than Saudi", "enough carbon to cook the planet", but reality is somewhat different. The amount of petroleum extracted from the planet's crust is not only a function of demand, supply also counts. It so happens that these resources are at the moment the most expensive to obtain, therefore the most vulnerable in contraction periods.

The Guardian
Shell halts Carmon Creek oil sands project in Alberta, Canada

Royal Dutch Shell will halt construction of its Carmon Creek thermal oil sands venture in Canada due to “uncertainties” facing the project, including a lack of infrastructure.

The decision to stop the project in the western province of Alberta comes as Shell cuts costs and a shortage of pipeline capacity constrains growth in the Canada’s oil sands industry.

Shell chief executive officer Ben van Beurden said: “We are making changes to Shell’s portfolio mix by reviewing our longer-term upstream options worldwide, and managing affordability and exposure in the current world of lower oil prices.

“This is forcing tough choices at Shell.”
This is the reason behind the warning issued this week by Fatih Birol. It is simply not possible to extract 80 Mb of petroleum every single day at 50 $/d. The supply destruction cycle will come to a close at some point.
Governments shouldn't count on low oil prices: IEA
Jessica Jaganathan and Florence Tan, 26-10-2015

Countries should not bank on oil prices remaining low when formulating their energy policies, as supplies could tighten from mid-2016 due to a drop in investment and falling U.S. output, a senior industry official said on Monday.

Global oil prices LCOc1 have more than halved since June 2014 on rising U.S. shale oil output and as members of the Organization of the Petroleum Exporting Countries (OPEC) decided to defend market share rather than cut production.

"It will be a great mistake to index our attention to oil security to the oil price trajectory in the short term," Fatih Birol, executive director of the International Energy Agency (IEA), said at the Singapore International Energy Week.
Over at the US the weekly warnings on the impending "shale oil" catastrophe keep popping up. However, sources close the industry tell me that the US banking industry will keep refinancing what are essentially bankrupt companies at least into 2016. Banks seem to prefer the continuous money bleeding than a full out junk bond crisis.
Next Few Weeks Will Reveal Full Extent Of Oil Industry Suffering
Nick Cunningham, 26-10-2015

Persistently low oil prices are putting a lot of pressure on the dividend policies of oil and gas producers. The Wall Street Journal reported that four oil majors – BP, Royal Dutch Shell, ExxonMobil, and Chevron – have a combined cash flow deficit of $20 billion for the first half of 2015. In other words, these big players are not earning enough revenues to cover expenditures, share buybacks, and dividends. With such a large cash flow deficit, something has to give. All four are focusing on slashing spending in order to preserve their promises to shareholders, with dividends especially seen as untouchable.

However, it could take several years to bring spending into alignment so that cash flows breakeven. The problem for these companies is that they were also cash flow negative even when oil prices were above $100 per barrel in the years preceding the bust in 2014. Over the past decade, costs at all of these companies have all been heading in the wrong direction – higher spending on new projects, dividend payouts, and share buybacks have all driven costs dramatically higher. The WSJ notes that Chevron’s dividend bill doubled since 2004, for example, and its capital spending increased by six fold. Higher oil prices over that timeframe allowed for this cost inflation, but the oil majors were still cash flow negative. Now that oil prices have crashed, the deficit has ballooned, forcing painful cuts to payroll and spending for new oil projects.

[...] Meanwhile, smaller companies don’t have the luxury of time that the oil majors have, particularly those in the oilfield service sector where demand for rigs has all but disappeared.
But if the American banking industry keeps financing the petroleum industry, that does not mean the latter is operating as before. Petroleum output from source rocks and "tight" reservoirs has clearly peaked and is to keep declining for the foreseeable future.
U.S. Oil Imports On The Rise Once More
Charles Kennedy, 26-10-2015

The massive increase in oil production in the United States over the past half-decade has significantly cut into America’s dependence on oil imports.

The share of total oil consumed in the United States that came from imports peaked in 2005 at 60 percent, a dependence that fell to below 30 percent in 2014. Oil flowing from North Dakota and Texas helped to cut out the need to import oil from around the world.

However, after persistently low oil prices for the past year, U.S. oil production is falling. At the same time, cheap crude is stoking demand, as American motorists take advantage of low gasoline prices. Lower domestic supply and higher demand have put a halt to the declining import bill for the United States, which had been more or less decreasing for a decade.

U.S. oil production peaked in April at 9.6 million barrels per day, and since then oil imports have started to move up, jumping more than a half million barrels per day.
In the Geo-political plane, Iran and Russia keep rising as the key powers in the future of the Middle East north of the Persian Gulf. Iran is now an unavoidable player in an exit to the war in Syria.
Russia Today
Serious Syrian talks: Is Iran’s involvement a game-changer?

RT: What impact will Iran's participation in the talks have on diplomatic efforts to resolve the Syrian crisis?

Dan Glazebrook: Iran’s involvement has been essential to any kind of serious attempt to get a peaceful resolution to this conflict. That has been clear from the start; Iran has been one of the main forces involved in aiding the Syrian people’s struggle to prevent the total collapse of the state. Iran’s importance was recognized back in January 2014 by Ban Ki-moon who actually organized for Iran to be involved in peace talks until that was sabotaged by the US. So, their role is absolutely crucial, this has been recognized for a long, long time.

And so, the real question is why now after years of basically trying to sabotage any Syrian peace talks have the US and the allies – the Saudis, Britain and so on – now come to their sense and suddenly decided to support Syria’s peace talks. And I think the answer is very obvious – their side is on the verge of total defeat and this is the reason for their sudden Damascene conversion to peace talks which they have been consistently trying to sabotage for the last few years. So, Iran’s involvement is just the reflection that all sides are now understanding the need for serious Syrian peace talks. Because the US understands that there is no viable military solution for each side any longer. It has been sabotaging the past because it thought it preferred to pursue a military option. If it continues with the solely military option it is just going to be a complete defeat and humiliation even worse than that they are facing at the present moment. So, Iran’s involvement is crucial and this is very important step, absolutely.
Iran is also making the best of its soon to be re-instated status as full player in the international chessboard. Access to the BRICS New Development Bank may mean a demise to the pre-sanctions predominance of Europe in foreign investment in the Islamic Republic's economy.
Russia Today
Iran to join BRICS New Development Bank

Tehran intends to participate in the BRICS New Development Bank, the Iranian Tasnim news agency reported on Monday, citing an Iranian official.

The Iranian Deputy Minister of Economic Development Mohammad Khazaee said at a meeting of a joint Iran-Brazil economic council that the country is aiming to join the BRICS bank.

The Bank was established in July at the BRICS summit in the Russian city of Ufa. The NDB intends to promote sustainable development in BRICS states. The start-up capital is $50 billion and is projected to reach $100 billion. The headquarters of the bank is in Shanghai.
One interesting twist to this coalition in the northern Middle East is the imbalance it may produce within OPEC. Suddenly, Iran is no longer isolated in the cartel, gaining increasing clout with its new found allies.
Saudi Arabia Oil Monopoly: Could Russia and Iran End it?
Marie Cabural, 22-10-2015

[...] Experts in the oil industry suggested that Russian President Vladimir Putin appeared to be plotting to bring down OPEC (Organization of Petroleum Exporting Countries) based on his recent actions in the Middle East. Saudi Arabia is the biggest OPEC producer and the largest exported of crude oil worldwide.

Russia recently reached agreements with Iran, Irag, and Syria on intelligence and security cooperation. The country is currently providing military support for Syrian President Bashar-al Assad in its fight against anti-regime rebels and terrorists.

Saudi Arabia understands that Putin is looking for opportunities to hinder its interests, and the best way is to target OPEC, its soft spot. The Kindom is concerned that Russian could partner with Iran and Iraq to reduce its market share in China and India. During the first six months of this year, Saudi Arabia’s share of crude oil imports to China was 16% and 20% in India.
And the coalition expands, with Jordan increasingly willing to involve itself. Obviously, the jihadists being trained and armed by the US are not very popular in Jordan, and over there no euphemisms such as "rebels" or "moderates" are employed.
Jordan Moves Closer To Russia

On October 23, 2015, the Government of Jordan signed a new agreement with Russia on counter-terrorism cooperation. Russian Foreign Minister Sergey Lavrov noted: “Under an agreement between His Majesty King Abdullah II and Russia’s President Vladimir Putin, the militaries of the two countries have agreed to coordinate their actions, including military aircraft missions over the Syrian territory.”

Jordan has been, and remains, a significantly Western-oriented state, but it has, to some degree, recog-nized that it needs to find ways to guarantee its sovereignty with the pronounced decline in U.S. or Euro-pean security support.

[...] The move reflects the growing disenchantment among senior Jordanian officials with what they have felt was the abuse of Jordanian hospitality, in the activities of U.S. and allied intelligence services in training, arming, and managing anti-Assad jihadist fighters from Jordanian soil in the Syrian conflict. In addition, Jordanian officials have reacted angrily to an October 7, 2015, statement by U.S. Democratic Party presidential candidate Hillary Clinton which questioned Jordan’s political stability and what she described as its “uncertain future.”

[...] Russia’s Rosatom, on March 24, 2015, signed a $10-billion deal with Jordan to build a 2,000 megaWatt nuclear reactor at Amra in the north of the Kingdom, with Russia meeting 49 percent of the project costs. [...]
On a different domain is another article revisiting what was the greatest energy hoax ever created in Europe. Large sums of money were burned drilling for gas that only ever existed in news articles, promotional brochures and spreadsheets. It is never too much to revisit this story, for much is there to learn from it.
Financial Times
Eastern European shale exploration on ice as boom turns to bust
Neil Buckley, 28-10-2015

[...] Tim Wallace, Conoco’s manager in Poland, said after drilling seven wells in three exploration blocks, and investing about $220m since 2009, “unfortunately, commercial volumes of natural gas were not encountered”.

Just a few years ago, Poland’s government had hoped commercial shale gas production would be under way by now. Instead, after more than 70 test wells were drilled on 45 blocks, with investment totalling $2bn, no industrial-scale production has begun.

[...] On top of all that, in the words of one executive from a US oil major, “the rocks aren’t there”.

Geological formations that appeared promising in countries such as Poland have turned out to be more difficult to fracture with existing technology than reserves in North America. Some industry insiders say the geology has been the biggest single factor holding back development of central European shale.
Closing is an article sent by reader Dave Thomas. I must confess I was not aware of this case, it shows and ugly side of petroleum extraction, and globalisation in general, that rarely makes it to the press. This is but one more aspect calling for an entirely different approach to energy policy, based on decentralisation and self-reliance.
The Guardian
‘I was kidnapped, chained and blindfolded. They’d kill me if I went back to Colombia’
Ed Vulliamy, 26-10-2015

While peace edges closer in Colombia – ending a 40-year war between the government and leftwing Farc guerillas – so another war rages unabated: the appalling violence that surrounds mining and drilling for oil.

A remarkable survivor of these atrocities visited Britain this month for a tour of public meetings about his kidnap and torture, warning of the ravages of “extraction industries” in Latin America, and to consult his lawyers over a suit he has filed against BP for its alleged connections to the kidnappers.

Trade union activist Gilberto Torres was abducted by paramilitaries, apparently connected to the security arm of Ocensa – the joint venture company transporting BP’s oil, and in which it was an active member – in February 2002, and held for 42 days, during which time another man with whom he had been kidnapped was decapitated.
That is it for this time. Have a nice weekend.

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